Harris and the Missing Beneficiary

Earlier posts have looked at various aspects of the leading family law and trust case of Harris – see -

A Practical Analysis of Harris

Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/xO0rrLqGSkU

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

A further very interesting aspect in the case of Harris, is that over many years, there'd been distributions made to a bucket company by the relevant family trust.

The 100% shareholder in that bucket company was the husband. So the wife had a legitimate expectation in relation to that company that she would be absolutely entitled to at least 50% of that under the property settlement.

There was over $1 million worth of distributions that had been made to that bucket company over time out of the family trust that owned the business.

What the court did was that they actually read the trust instrument.

The trust instrument was quite particular on who the beneficiaries were, including saying that any bucket company must be expressly listed as a beneficiary. Here the relevant company wasn’t listed as a beneficiary.

This meant there had about eight or nine years’ worth of distributions that had been purportedly made to the bucket company which were in fact all void.

The family court said we don’t need to get our hands dirty on what the Tax Office might think about that, but we suspect they will be interested. For the purposes of the family law case, the husband was ‘fine’ because the bucket company was in fact valued at nothing.

A Practical Analysis of Harris

A previous post has looked at various aspects of the leading family law and trust case of Harris – see - Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case and trust splitting in a ‘vidcast’ at the following link - https://vimeo.com/154687783/

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

Harris is an example of the interplay between using a bespoke constitution, but not doing a trust splitting exercise.

In this situation, under an estate planning arrangement, the dad was the original shareholder and director of the corporate trustee. He died and under his estate plan, he gave shares in the company to the adviser, he gave shares to the husband (his son) and then mum (the wife) retained her shares in the trustee company.

These shareholders also acted as the board of the trustee company.

Inside that family trust was a family business that had been running for many years. The husband was, on all the evidence, important to that business and had a really key role. At no stage did the family attempt to split the trust though.

The husband had siblings, it was clearly still the ‘family’s trust’ and there were still all of the normal rules and obligations you'd expect. The husband had not otherwise been given any significant control. Thus, on his argument, the trust was not an asset of his in the family court scenario.

The wife said the opposite. The wife said even though the family hadn't gone through a trust splitting exercise in a formal sense, there were significant assets that were the husband’s, and therefore, they're things she was entitled to 50% of.

The court held that family law cases will turn on the facts.

Here, they were satisfied that the husband has no control.

There was no de facto splitting.

The terms of the corporate trustee constitution meant that the trustee directors must act jointly and in concert.

There was no evidence to allow the court to assume that the mum was somehow under the manipulation or control or acting as the mere puppet of the husband.

This meant the court essentially ignored the trust.

The reality however is that if the family had gone down the trust splitting path, you can almost guarantee that the earlier family law case of Pittman (email me if you would like a copy of that decision) would have been followed. In that case the court held that assets of a family trust, being a business, were exposed to a family law settlement.

Read the deed - another reminder re invalid distributions

A structure diagram of the trust in Harris v Harris [2011] FamCAFC 245 

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week extracted below.

Practitioners will be aware, from many previous articles in this Bulletin (and elsewhere), of the critical importance that trust deeds should be read before making any distribution of income or capital. While the "read the deed" mantra should be indelibly etched in practitioners' minds, regular reminders of the dangers of not doing this are not out of place.

One example of a family law case of Harris v Harris [2011] FamCAFC 245 where the range of potential beneficiaries was critical was profiled in our article at 2012 WTB 39 [1586].

In that case, the trial judge in a family court matter noted that the recipient of trust distributions (being a company), who was being challenged, was not in fact an eligible beneficiary of the relevant trust. If the company had been simply nominated as a potential beneficiary, then the distributions would have most likely been valid.

A more common example of where difficulties with invalid distributions arise, however, relates to where particular potential beneficiaries are in fact expressly excluded by the trust deed. The most common example in this regard is the exclusion of the trustee, be that the current, former or even a future trustee, from being a beneficiary of a trust.

These types of clauses are often found in deeds prepared by New South Wales advisers. This is primarily because s 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:

1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 

An example of a clause adopting an approach that ensures access to the stamp duty relief is as follows:

"The Trustee for the time being of the Trust can not be a beneficiary of the Trust. None of the continuing Trustees remaining after the retirement of a Trustee is or can become a beneficiary under the Trust, and none of the Trustees of the Trust after the appointment of a new Trustee is or can become a beneficiary under the Trust."

New South Wales is the only Australian jurisdiction that has this type of restriction on accessing the duty concessions for a change of trustee and, understandably, clauses drafted in this manner are extremely prevalent with deed providers or lawyers based in New South Wales.

In many instances, however, there may in fact be no other connection with New South Wales for anyone associated with the trust.

The risks created by this drafting approach will, therefore, often be less than obvious. Anecdotally, there would seem to be an increasing number of situations where invalid distributions are being discovered that stretch back over many years and involve significant levels of invalid distributions.The exact ramifications of this type of situation will depend on a range of issues, including how any default provision under the relevant trust deed is crafted. This said, an embracing by all advisers involved with the administration of the trust of the mantra "read the deed" would avoid the issue ever arising in the first place.

Until next week.

Contribution assessments in family law cases

The posts for the last 2 weeks have focused on the decision from the end of 2011 of Harris.

One final aspect of the case that it is worth highlighting involved the comments made by the Court about the ‘contribution’ that the parties to the marriage, and their respective families, made to growing the asset base during the course of the relationship.

As many will be aware, once the court has determined the property that satisfies the definition of being an ‘asset’ of the marriage and then in turn the property that is a ‘resource’, there is a need to determine the contribution the parties have made to creating the wealth.

In the Harris case, the appeal court expressly directed that in the retrial (which is yet to take place) the judge must be careful to ensure that adequate weight is given to the husband and his parents in terms of building up the value of the business that was owned by the family trust at the centre of the dispute.

This direction was as a result of the initial trial judge’s decision to simply ignore the contribution that had been made by the husband and his parents over many years, both before the marriage and during the course of it.

Until next week.